u.s. expat tax guide – mexico
Is Mexican rental income reportable to the IRS?
Yes, if you’re a US citizen earning rental income from a Mexican property, you must report it to the IRS. This applies whether the property is rented long-term or through platforms like Airbnb.
How do you declare rental income on your US tax return?
You start by listing the total rental income you received.
From that, you can deduct allowable expenses like property management fees, repairs, and utilities. If your rental income exceeds your expenses, the difference is taxable.
On the other hand, if your expenses are higher than your income, you may be able to report a loss, which could offset other income and potentially reduce your tax burden.
Does the property ownership structure affect what you report?
Yes, your ownership structure matters. For example, if you co-own the property with a non-US spouse, you’ll only report your share of the income and expenses. So, if you own 50%, you’ll only declare 50% of the rental income and 50% of the associated costs.
Is Form 8858 required for foreign rental income?
Yes. If you’re earning rental income from a foreign property, Form 8858 is required when filing your US tax return. It’s similar to Schedule E, which is used for domestic rental properties, but for foreign assets.
Failing to file Form 8858 can result in penalties, potentially reaching up to US$10,000 per violation.
When does a home not count as a rental property?
If your home is rented out for fewer than 15 days a year, the IRS doesn’t classify it as a rental property, meaning you don’t need to report the income. However, you also won’t be able to claim any deductions for expenses related to the property.
Personal Use or Minimal Rental Use
- Minimal Rental Use: If the property is rented out for less than 15 days per year, you don’t report the rental income, and rental expenses are not deductible.
- Mixed Use: If you use the property for personal and rental purposes, rental income and expenses are only partially deductible, based on the time the property was rented.
| Type of Use | Tax Treatment |
| 100% Rental Use | Report all rental income and deduct all expenses. |
| Mixed Use Property | Deduct expenses based on the percentage of rental use. |
| Minimal Rental Use | No need to report income; no expense deductions. |
What expenses can you deduct from your rental income?
Several expenses can be deducted from your rental income, reducing your taxable income:
- Mortgage Interest: Deduct the interest paid on your rental property’s mortgage.
- Property Taxes: You can deduct taxes paid to Mexican authorities.
- Insurance: Costs related to insuring your rental property are deductible.
- Maintenance and Repairs: Necessary expenses for maintaining the property.
- Utilities: If you cover the utilities, you can deduct these expenses.
- Depreciation: Deduct a portion of the property’s value each year.
- Travel Expenses: Costs incurred for managing or maintaining the property.
- Advertising Costs: You can deduct costs for marketing the rental.
- Professional Fees: Legal, accounting, and management services are deductible.
Do you need to convert foreign currency to US dollars?
Yes, the IRS requires you to report all foreign income, including rental income, in US dollars. You can use the average exchange rate for the year or the rate on the date of each transaction.
Why is accurate record-keeping important?
It’s essential to maintain detailed and accurate records of all rental income and expenses. Proper documentation is critical in supporting any deductions you claim and is necessary in case of an audit by the IRS.
What about FBAR and FATCA reporting?
If you deposit rental income into a foreign bank account and the total value of your foreign accounts exceeds US$10,000 at any point in the year, you must file an FBAR (FinCEN Form 114).
Additionally, if the total value of your foreign financial assets exceeds specific thresholds, you may also need to file Form 8938 under FATCA.
Should you hire a tax professional for foreign rental income?
Yes, working with a tax professional is highly recommended. They can help ensure compliance with IRS rules, assist in claiming deductions, and make sure all relevant forms are filed accurately and on time. This can significantly reduce your risk of errors and maximize your tax savings.
